Forecasts For The Final Bottom In Silver

In our daily gold and silver tradingnewsletter, we usually focus on either short- or medium-term price swings, but in this essay we’ll do something quite different. We are going to analyze the silver market from the long-term perspective and we are going to focus on what’s important from the long-term point of view.

In today’s article we’re going to focus on silver. The situation in the case of the white metal is more difficult to project because of silver’s volatility, but it doesn’t mean that estimating silver price targets is impossible. In today’s article we’ll do exactly that.

However, before we dive into details, let’s recall the several main reasons for which we think the final bottom in the precious metals market is still ahead of us.

The most general and most important observation regarding the precious metals’ performance in the last several years is that they have been declining – it is not a one time event most gold and silver investors had hoped it to be, but a new medium-term trend – and a quite powerful one. Major trends tend to end in a profound manner – during tops everyone wants to buy and when the bottom is formed everyone panics.

So far the rallies (even significant ones, when viewed from the short-term perspective) have just been corrective upswings that were followed by further disappointments. We haven’t seen a rally that would be strong enough to end the medium-term decline and we haven’t seen a bottom that would be accompanied by real panic among gold and silver investors.

However, that’s not the only reason we think the final bottom in precious metals is still ahead of us. There are multiple other technical reasons for it, but let’s just recall 2 facts: firstly, when the European QE was announced, gold and silver didn’t rally – the former declined more than $100 while the latter declined by about $3. Furthermore, gold stocks are not outperforming gold in the medium term (and yes, since the entire precious metals market tends to move together, this has bearish implications for silver as well). If we had been after a major bottom, we would have expected silver and gold to rally in light of the EU-QE announcement and gold stocks to visibly outperform the yellow metal. However, that’s not what happened – it seems that precious metals haven’t declined enough for the trend to reverse.

So, how low will silver have to go for the final bottom to form? Let’s take a look at the long-term silver chart (chart courtesy of http://stockcharts.com).

In the past several weeks, we read quite a few commentaries about silver’s “breakout” and it’s supposedly bullish consequences. However, in many years of analyzing the silver market we’ve seen too many times the unconfirmed moves in the white metal were reversed to simply take the breakout for granted. It turns out that silver invalidated its recent breakout and it did it in a quite visible and profound manner – silver is well below the declining resistance line once again. The breakout was supposed to be bullish and in the end, its invalidation has bearish implications. If you’re interested in learning more about invalidations and other trading techniques, we invite you to visit our gold and silver trading tips page.

Having said that, let’s discuss the target areas that you can see on the above chart. We have recently updated our target areas and we even added one more. Yes – it’s below $10, but before you close your browser window thinking that we lost our minds, please give us a few minutes to explain.

Why are silver prices likely to move lower in the coming months? Because we haven’t seen a lot of confirmations that the final bottom in the precious metal sector is in – there was no real panic that could end this decline. Why have we marked the areas that you can see on the above chart and not some other price ranges? Because that’s where the strong (!) support levels / lines are and / or where they intersect.

First of all, the initial target is at or slightly above the 2014 low. The 2010 and 2014 lows are both significant price levels and thus we think that they are likely to trigger a corrective upswing or a pause. Can silver form the final bottom at that price level? Yes, but we doubt it. Nevertheless, we will monitor the markets for signs of confirmation when silver is close to these levels.

We put the second target area in bold because we think it’s the most likely area for the final bottom to form. The area is quite wide because there are quite a few support levels / lines that need to be taken into account: 2 local bottoms from 2009 and – more importantly – the lower border of the declining trend channel (green) and the line based on the mid-2011 and 2013 lows. It seems that the place where the red line intersects with the lower of the 2009 lows is the most likely target – just below $12.

Our lowest target area is not much of a target area itself – it’s more of a “worst case” or “best case” scenario (depending on one’s approach and whether one will already be holding silver at these levels or is planning to buy at them). The area below the $10 level is the place where silver can go very temporarily. Please recall silver’s sharp and very temporary bottoms in early 2006, in mid-2007, and in early 2010 – we can see something like that but to a greater extent. It would not surprise us (and we mean exactly that – it’s not our prediction) to see silver “bottom” at $11-something, and then move below $10 for just a few hours and end the session back above $11. Silver could even end the week in which the above would take place above $12 or $13. Silver is very volatile at the final bottoms and that’s going to be THE bottom. We can expect to see the level of volatility that we have never seen before and that’s why we don’t rule out such a significant and temporary decline.

Let’s move on to probabilities. Here’s how we view the outlook for silver and its final bottom:

10% probability that the final bottom in precious metals is already behind us

20% probability that we’ll see the final bottom with silver at $14 - $14.70

50% probability that we’ll see the final bottom with silver at $11 - $12.50

15% probability that we’ll see the final bottom with silver at $8 - $10

5% probability that we’ll see the final bottom with silver below $8.

Just like we described it earlier – the key thing to watch out for are not the price levels themselves, but rather the confirmations that we’ll see (or not) when the above levels are reached. If we see many confirmations with silver above $14, then it will be likely that this is the final bottom. However, if we don’t see them with silver at $12 or so, the odds would be that we would need to see a move below $10 for investors to panic and for the final bottom to form.

Summing up, we think that the price of silver will move much higher in the following years (just like the price of gold and the prices of mining stocks), but only after it declines substantially enough to trigger panic selling and shake enough people out of the market. The final part of the decline in silver can be very volatile so we suggest preparing for it in advance.

Please note that the above is based on the data that was available when this essay was published and we might change our views on the market in the following weeks. In order to stay updated on our thoughts regarding the precious metals market and our free articles we suggest that you sign up to our gold mailing list – it’s free and if you don’t like it, you can unsubscribe anytime.

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.